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Thursday, September 22, 2005

STRS 'a Stirring

The following first appeared in Capitol Weekly

Governor rebuilds STRS board as Capitol pension battle loom

By Shane Goldmacher (published September 22nd, 2005)

Gov. Arnold Schwarzenegger is gearing up for another pension reform battle next year by reshaping the California State Teacher’s Retirement board with new trustees. This, after the powerful board—which directs the investments of $133 billion—voted down his pension reform proposal earlier this year. But each of Schwarzenegger’s new trustees—two of whom were nominated last week—face confirmation in the Senate, which already rejected the lone trustee that supported pension reform.

In January, Schwarzenegger proposed that the state pension system shift from a defined-benefit system, where retirees are guaranteed a pre-determined level of benefits, to defined-contribution system, where retirees receive benefits based on the amount contributed, plus the stock market’s return on that investment.

“Like the budget itself, our state pension system is another financial train on another track to disaster,” Schwarzenegger announced in the State of the State address, citing the state’s ballooning pension obligations, which rose from $160 million in 2000 to $2.6 billion last year.

But only months later, Schwarzenegger’s reform itself was derailed, as the 12-member CalSTRS board of trustees rejected the proposal, with the only dissenting votes coming from then-Director of Finance, Tom Campbell, and Schwarzenegger appointed trustee Kathleen Smalley.

The governor himself withdrew his pension plan in the spring, after firefighters and police lobbied (and aired ads against) him for eliminating existing death and disability benefits. The governor vowed to return to pension reform in 2006.

Four of the ‘no’ votes on the board, on which the state controller, treasurer and superintendent of schools all sit, came from Schwarzenegger’s own appointees. After the vote, Schwarzenegger withdrew the nominations of those four trustees. The governor appoints five trustees to the board.

“The governor concluded that those particular appointees were not best suited to implement his vision for reform,” said gubernatorial spokeswoman Julie Soderlund.

In April, the Senate Rules Committee rejected Smalley, the only Schwarzenegger-appointed CalSTRS trustee to support his reform.

“As a STRS board member, you are obligated to do your fiduciary duty and assess how an initiative like that will impact the assets and liabilities for CalSTRS,” said Mark Battey, a since withdrawn Schwarzenegger-appointed trustee, who says that he is not opposed to a defined-contribution retirement system, just the particular reform the governor had proposed. “It would have impacted CalSTRS’ ability to serve its mission and pay benefits to CalSTRS retirees.”

Battey calls the administration’s decision to withdraw nominees “ironic,” considering that Schwarzengger himself scrapped the reform. Assemblyman Keith Richman, R-Northridge, who has worked closely with the administration on the issue, says, “The governor continues to be committed to pension reform…He said that if pension reform didn’t occur in the Legislature, he was willing to go back to the ballot with an initiative.

Well, absolutely nothing occurred in the Legislature.” Richman introduced his own pension reform proposal, ACA 23, on the final day of the legislative session.

Perhaps in preparation for next year’s initiative battle, in recent months Schwarzenegger has nominated five new CalSTRS trustees—four Republicans, Elizabeth Rogers, Kathleen Brugger, Roger Kozberg and Jerilyn Harris, and one Democrat, David Crane, a long time Schwarzenegger friend, and the governor’s special adviser for jobs and economic growth.

Crane also openly supports the governor’s pension proposals, saying that defined benefit creates, “tremendous burdens on future innocent parties.” “All the governor proposed would be a limitation to some of these special privileges held by government employees,” said Crane at a recent San Francisco luncheon. “So I fully support the governor’s agenda.”

Republicans point out that the CalSTRS, which has approximately 750,000 members, is facing a $24.2 billion shortfall that needs to be addressed, otherwise taxpayers are on the hook for teacher retirement benefits.

“Pension costs are a ticking time bomb for California,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “The other side will use disinformation to sidetrack any reform, sooner or later ordinary voters will come to understand that something needs to be done.”

The office of Phil Angelides, state treasurer, and Democratic gubernatorial candidate, who sits on CalSTRS, said, “The Governor should not demand that his appointees choose between disregarding their fiduciary responsibility and a pink slip.”

The new appointees face confirmation in the Senate where several high-profile gubernatorial nominees have recently been rejected, including Cindy Tuck for Chair of the Air Resources Board, Joan Borucki to head the Department of Motor Vehicles.

Sen. Gil Cedillo, D-Los Angeles, who sits on the powerful Rules Committee along with Senate President Pro Tem Don Perata, D-Oakland and Sen. Debra Bowen, D-Marina Del Rey, said, “I think there are two things we look for. We look for competency and if they understand their fiduciary duties.”

A gubernatorial spokewoman says the nominees to the STRS board meet that standard, “Each one of the individuals is well-qualified and has the expertise to serve the taxpayers and teachers of California, and shares the governor’s commitment for reform.”

But that shared commitment is what worries Mark Battey.

“I hope they are going to properly act an independent fiduciaries. They are not representatives of the governor’s office. And that is a view that may not be shared by the governor’s office.”